While our members, European managers of private equity funds, will not be captured as shadow banking entities under the proposed approach, we did want to share our thoughts on the potential implications of the EBA’s method.
First, we provide our full support to the EBA’s decision, in Article, paragraph 5, section ii) of the RTS that only funds that are substantially leveraged should be considered as shadow bank entities. The AIFMD cross-reference represents a substantial improvement compared to previous EBA guidance. We however note that a more complete, “self-standing” reference to “AIFs with an exposure (calculated according to the commitment method under Article 8 of Regulation Commission Delegated Regulation (EU) 231/2013) which exceeds three times its net asset value” would likely provide more clarity than a simple cross-reference.
We also appreciate the statement made in the Consultation paper Background & Rationale (Section 3, paragraph 76) that "only exposures to AIFs that do not employ leverage on a basis according to Article 111(1) of Delegated Regulation 231/2013 and that do not grant loans or purchase third parties’ lending exposures onto their balance sheet should be excluded from being identified as shadow banking entities".
An RTS based on this statement would have ensured that only AIFs that generate their own exposures while being substantially leveraged would be deemed as shadow banks. This would in our view have put under the right amount of scrutiny non-bank entities effectively performing banking services that are prone to create a systemic risk. Finally, it would also have been closest to the limits of Article 394(4)’s mandate as it would have best " take[n] into account international developments and internationally agreed standards on shadow banking".
It is therefore disappointing that, in the actual draft of the RTS, the EBA appears to have taken a stricter approach, and introduced a simple positive step (as opposed to a double negative one) where any AIFMD manager is, irrespective of its other activities, considered as a shadow bank as soon as the fund it is managing is substantially leveraged.
We do not question that the use of substantial leverage in a fund context can give rise to systemic concerns and that this should be addressed as part of the relevant EU law.
Nonetheless, the approach chosen will lead to a situation where entities will be deemed “shadow banks” irrespective of whether:
- they are regulated under EU law
- they are or not involved in lending activities
- they are effectively interconnected with the rest of the financial system
While the proposed EBA definition of a shadow banking entity may be relevant for the purpose of Article 394, it is in our view not sufficiently sophisticated and could as such constitute an unhelpful precedent for the future, leading to regulatory confusion as to the actual risk these funds pose. This is certainly true from the perspective of the private equity industry, where funds are rarely using debt at fund level other than when such debt is backed by uncalled commitments, and which, could in exceptional situations be deemed “shadow banks”.
Perhaps one of the major concerns we have as alternative investment fund representatives is the description the EBA makes of the AIFMD as a framework where "some risks arising directly from the funds themselves are not mitigated satisfactorily". As we show in the regulatory table attached, AIFMD and UCITS introduced similar rules when it comes to the use of leverage – and we see no reason to distinguish the two from a prudential perspective.
See our response to Question 5 for more details. Overall, we would see many disadvantages in adopting a broader approach.
See our response to Question 5.
See our response to Question 5. Only covering substantially leveraged AIFs is a step in the right direction but it is not clear to us why the EBA feels that any funds regulated under AIFMD - and subject to specific leverage rules - shall be deemed shadow banks - especially if they are not engaged in any lending activities.